It Costs More to Borrow Less, Says Zillow Mortgage Analysis

Borrowers with low loan amounts pay 10% more for every dollar than borrowers with high loan amounts

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May 14, 2015, 08:00 ET

SEATTLE, May 14, 2015 /PRNewswire/ -- Compared to borrowers with $400,000 home loans, borrowers with loans of $100,000 pay 10 percent more for every dollar borrowed due to higher interest rates and fees. Additionally, borrowers with small loan amounts have substantially fewer lenders willing to lend them money, according to an analysis of loan requests and quotes on Zillow® Mortgages. More than one-quarter of all U.S. homes would have a mortgage of $100,000 or less if 20 percent were put down on the home.

All things being equal, including credit score and loan-to-value ratios, borrowers with small loan amounts were offered more expensive loans compared to borrowers with high loans amounts. The average interest rate offered on a $100,000 home loan in the first quarter of 2015 was 3.95 percent with an APR of 4.06 percent. The average interest rate offered on a $400,000 home loan during the same period was 3.64 percent with an APR of 3.7 percent. The larger the difference between the interest rate and the APR, the more it costs the homebuyer per dollar borrowed.

Low loan amount borrowers also had limited options for their home loan. The typical borrower seeking a loan for $100,000 received half as many loan quotes from lenders compared to similar borrowers seeking loans for $400,000.

"Lenders go after big loan amounts and back-burner small loan amounts because even though they take the same amount of time to complete, the larger the loan amount is, the more a lender typically makes," said Erin Lantz, Zillow VP of mortgages. "Since there is less competition for small loan amounts, lenders offer higher interest rates to help cover the costs and many low-to middle-income borrowers have no choice but to pay more."

If a borrower with a $100,000 loan were offered the same interest rate and APR as a borrower with a $400,000 loan, they would save 4 percent per month or $7,560 over the life of a 30-yr fixed rate loan.

Even lower loan amounts of $50,000 were offered an average interest rate of 3.9 percent with an APR of 4.14 percent, and have 88 percent fewer loan quotes from one-sixth as many lender as similar borrowers seeking loans for $400,000. Loans for $50,000 cost an average of 12 percent more than loans for $400,000ⁱ.

About Zillow:
Zillow® is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with the best local professionals who can help. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow's Chief Economist Dr. Stan Humphries. In 2015, Dr. Humphries co-wrote and published the New York Times' bestselling "Zillow Talk: The New Rules of Real Estate." Dr. Humphries and his team of economists and data analysts produce extensive housing data and research covering more than 450 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. Zillow also sponsors the bi-annual Zillow Housing Confidence Index (ZHCI) which measures consumer confidence in local housing markets, both currently and over time. Launched in 2006, Zillow is owned and operated by Zillow Group (NASDAQ: Z), and headquartered in Seattle.

Zillow is a registered trademarks of Zillow, Inc.

ⁱ After 10 years, borrowers with loans of $50,000 pay 11 percent more for every dollar borrowed than borrowers with loans of $400,000.

SOURCE Zillow